Limited company accounts: worked examples

Method and where the marks are

A limited company follows the same double entry as a sole trader. But ownership is divided into shares and the company is a separate legal entity, so the presentation and the treatment of profit differ.

The examiner rewards correct format above almost everything else here. Learn the standard layout of both the income statement and the statement of financial position, and reproduce it faithfully.

The income statement runs down to gross profit and then profit from operations in the usual way. Two company items appear near the bottom: finance costs, which are interest on debentures or loans, and the tax charge for the year if the question gives one. Deducting them gives the profit for the year, which belongs to the shareholders.

Profit for the year and retained earnings are different things. The income statement produces the profit for the year. That profit is then dealt with in a retained earnings working.

Start with retained earnings brought forward. Add the profit for the year. Deduct dividends paid during the year.

The result is retained earnings carried forward. For example, retained earnings brought forward are RM50,000, profit for the year is RM30,000 and dividends of RM10,000 are paid.

Retained earnings carried forward are 50,000 + 30,000 − 10,000 = RM70,000. That closing figure goes in the equity section of the statement of financial position, not the profit for the year. Confusing the two is a frequent and costly error.

Show each part of equity separately, because it tells the reader how the company is financed. List the issued share capital (ordinary shares, then any preference shares), then share premium, then other reserves such as a general reserve, then retained earnings. The total is the shareholders' equity.

A transfer to a general reserve is an appropriation of profit within equity. Deduct it in the retained earnings working and add it as a separate reserve line. It does not reduce total equity.

It relabels part of it. It is not an expense, so it never belongs in the income statement.

Show share capital at nominal value and any premium separately. Combining them loses marks.

Dividends and their timing need care. A dividend paid during the year is deducted in the retained earnings working. A dividend only proposed at the year end, and not yet approved, is not a liability and is not deducted.

At most it is noted. A dividend becomes an obligation only when it is properly declared.

Debenture interest is different. It is a real expense whatever the profit, so it goes in the income statement as a finance cost. Any interest still owing at the year end is accrued as a current liability. Keep dividends, which share out profit, apart from debenture interest, which is a cost of borrowing.

In the statement of financial position, long-term debentures or loans are non-current liabilities. Tax owing and accrued interest are current liabilities.

Check that total assets less total liabilities equals total equity. If it does not, you have misplaced a reserve or mishandled the tax or dividend.

Marks are mostly lost on these points. The transfer to reserves or the dividends are put inside the income statement, instead of in the appropriation of profit. A proposed but undeclared dividend is treated as a liability.

Preference dividends are confused with debenture interest. The profit for the year is carried into the statement of financial position instead of retained earnings carried forward.

Draw the statements in their standard order, run a clear retained earnings working between them, and label every reserve.

If company formats still feel like a lot to remember, we can help. One of our teachers can build the income statement, appropriation and statement of financial position with you from one past-paper question. Book a trial class